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After criticism surrounding its user safety and security practices, social media giant Facebook is reportedly actively pursuing a cybersecurity company to acquire.
By Kris Rosemann
Simulated Best Ideas Newsletter portfolio idea Facebook (FB) has struggled of late with public perception of the both the security and policing of its user base, and management appears seriously concerned with assuaging public pressure as it ramps up spending on such initiatives, which will continue to eat into operating margins and weighed on free cash flow generation. Mid-October reports of users’ personal data being exposed via a security flaw may have been a tipping point for the company, which came months after the widely-publicized Cambridge Analytica scandal, but public and political pressure has been on the company for some time now to make a material change in how it handles user information.
Facebook is now reported to be on the prowl for a major cybersecurity company. Such an acquisition may serve two purposes: one being the actual solidifying of its cybersecurity team and the other a win in the public-relations arena, the latter an area that has plagued the company of late. Facebook has made smaller acquisitions in the area of security in the past, but the report suggested that the next move would be on a much larger scale and could come before the end of 2018.
While the ultimate conclusion on whether or not buying a cybersecurity company is a proper and value-creating move comes down to the price paid and the company being acquired, Facebook has already shown that it is seriously investing in safety and security internally, and it is reportedly committed to expanding such teams to 20,000 from 10,000 people this year. As of the end of the third quarter of 2018, its total headcount sat at 33,606, a 45% increase from a year earlier. Bringing in an established company with a degree of scale would help the company build out its advancing security in a potentially more efficient manner, but skeptics believe that Facebook’s popularity may make it too popular of a target for the acquisition of a major cybersecurity company to serve its function, especially due to its business model being built on the collection and storage of data for the use of advertisers.
Regardless of whether or not an acquisition would solve Facebook’s security issues, it may be more feasible that working to build similar capabilities from the ground up, especially given the demand for rapid action and the company’s massive net cash position on its balance sheet. As of the end of the third quarter of 2018, it held $41.2 billion in cash, cash equivalents, and marketable securities and no debt on its balance sheet. Given this level of financial flexibility and its still robust free cash flow generation, Facebook has the resources to bring in just about any cybersecurity company it should desire, but sources close to the matter did not disclose the names of the companies that it has reportedly been in talks with.
On the surface, the move to bring in an outside security firm could prove to be a more effective way of building up its desired level of user safety and security, provided it is done at the right price, and Facebook should be able to win some points with respect to public relations, which have been hanging over the stock for some time now.
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Kris Rosemann does not own shares in any of the securities mentioned above. Some of the companies written about in this article may be included in Valuentum’s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.